Thursday, June 6, 2019
Woolworths Case Study Draft Essay Example for Free
Woolworths Case Study Draft EssayPart 1 Goodwill and Discontinued Operationsa) Carrying pry of goodwill 24 June 2012The carrying value of goodwill in Woolworths consolidate financial statements was $3221.8 Million (M) at 24 June 2012. This figure is include within intangible assets on the consolidated balance sheet and exact amount is let on in the Note 11 of Notes to consolidated financial statements (Woolworths 2012, p 126).b) Movements in carrying value of goodwillThe carrying value of goodwill at the beginning of the period was $3227.7M (Woolworths 2012, p 126). An additional $42.1M was recognised throughout the stratum due to additional acquisition of vexationes, with less . 5M for disposals and $0.7M for other expenses. Woolworths likewise recognised an detriment overtaking of $70.6M for the course of instruction. There was also an effect of movements in foreign qualify rates of $24.8M, which resulted in a carrying amount of $3221.8million at the end of the period (Woolworths 2012, p 126).c) Impairment loss on goodwilli) Impairment loss on Goodwill at 24 June 2012 was $70.6M.ii) Woolworths bill form _or_ system of government with respect to impairment testing of goodwill is consistent with AASB 139 Intangible Assets. Note 11 (Woolworths 2012, p 126) specifically states that intangible assets (such as goodwill) with indefinite useful lives are tested for impairment one-yearly and when there is indication that the asset whitethorn be impaired, the impairment loss is recognised when the carrying amount exceeds the recoverable amount. Recoverable amount is further defined to be the higher of fair value less cost to snitch and value in use.iii) Impairment loss on goodwill was a result of Woolworths announcement to restructure and divest the Consumer Electronics Business. The amount is also let loosed as discontinued carrying outs in Note 33 (Woolworths 2012, p 96) for $366.2M. AASB 5.32 defined discontinued operations to be a part of an enti ty that represents a stop melodic phrase, or part, of business or geographical area or subordinate word acquired exclusively for re exchange that had been disposed or classified as held for sale. A separate line item from continuing operations is required as a single figure smashd in statement of comprehensive income or Notes.iv) The fair value less costs to sell figure of $420M (Woolworths 2012, p 174) includes impairment loss, restructuring provisions relating to goodwill, inventory, plant property and equipment, and lease exit costs. Since the impairment loss attributed to goodwill was $70.6M. wherefore (420-70.6M) = $349.4M is attributable to fair value losses related to netassets. Since held for sale assets disclosed in the Balance sheet (Woolworths 2012, p 99) is $376.7M, the net assets prior recognising the loss would have approximately been (349.4+376.7M) $726.1M, assuming that transaction costs and lease exit costs are negligible.v) The Dick Smith Electronics brand and stores were sold for $20M (Janda 2012). As the held for sale assets was recognised to be $376.7M, the net loss Woolworths would recognise is (376.7-20) $356.7M in the 2012-2013 financial period.Part 2 Investments in controlled entitiesa) Woolworths restrain group structureb) Non-controlling interestThe carrying vaulting horse value of the non-controlling interest (NCI) in Woolworths Limited as at 24 June 2012 was $258.1 million (Woolworths 2012, p 103).This NCI is the dollar amount of the combined equity interests in the recruit companys subsidiaries non owned by the parent. When interviewed in 2013Professor Chris Nobes confirmed that the figure also represented the profits made by NCIs that have non yet been allocated to them. The respective NCI for the Woolworths Limited group applies to the external equity interests held in Woolworths Limiteds subsidiaries of ALH Group Pty Ltd, Australian Independent Retailers Pty Ltd, Bergam Pty Limited, Hydrox Holdings Pty Ltd and Statewi de Independent Wholesalers Limited (Woolworths 2012, p 164-167).Woolworths Limiteds annual report is not useful for non-controlling shareholders. The spring for this is the information regarding NCI is aggregated as it combines all the information from separate subsidiaries with NCIs into combined figures which cannot be separated by a shareholder. It may then be argued that information regarding NCI should be more detailed however when interviewed in 2013 Professor Chris Nobes suggested that non-controlling shareholders should only be interested in the reports of their subsidiary as they are more detailed.Fortunately there are separate financial statements available for the subsidiaries with non-controlling interests. The reason for this is that the class action, ASIC Class Order 98/1418, exempting slightly subsidiaries from report requirements only pertains to wholly-owned subsidiaries (Woolworths 2012, p. 168). Therefore separate financial statements are available for subsidia ries of Woolworths Limited that have non-controlling interests.c) AASB 3.19The Australian Accounting Standards Board (AASB) (2010, para 19) gives controlling entities a survival of the fittest between measuring the non-controlling interest (NCI) using the 100% method or the proportionate method. The proportionate method does not assign goodwill to the NCI as it relates to the subsidiarys net identifiable assets. In comparison the 100% method requires the non-controlling interest to be measured at its fair value which includes goodwill. One reason an entity may prefer to use the proportionate method is that it does not require a calculation of fair value for the NCI. The calculation of fair value for the NCI may be difficult in circumstanceswhere an active market does not exist.Using Woolworths Limiteds annual report we can gather information relating to which method they chose to use. Their substantial accounting policies relating to goodwill state that goodwill represents the diff erence between the cost of the acquisition and the fairvalue of the net identifiable assets acquired (Woolworths Limited 2012, p 108). Therefore this policy describes the same process for identifying goodwill as the process used in the proportionate method and it may be concluded that Woolworths is using the proportionate method.The issues regarding the pickaxe between the two methods are interesting. The choice seems to be more beneficial for the parent entity rather than the NCI as a company such as Woolworths Limited may choose to consistently use the proportionate method. This may misrepresent the value of the NCI to be lower as this method does not have a goodwill component for the NCI which the 100% method often has. Therefore the disclosures under the proportionate method made by Woolworths Limited regarding the NCI values could be undervalued. When interviewed in 2013 Professor Chris Nobes suggested that the choice between the two methods may affect comparability of financi al statements.This point is reiterated by the International Accounting Standards Board (2012, para BC210). A further issue according to the International Accounting Standards Board (2012, para BC213) is that the 100% method is more expensive to use which is one key reason for the inclusion of the proportionate method. Using all these arguments one can see that there are many perspectives about which method is better and whether a choice should have been included in the standard. Still we should not be too concerned as Professor Chris Nobes confirms in his 2013 interview that not many business acquisitions have NCI components or they have an insignificant NCI component and therefore the issue of choice under AASB 3.19 is small.Part 3 Segment notea) Reportable partsWoolworths (2012) has determine five reportable sections related to continuing operations according to AASB 8.13. Each reporting segment is managed separately due to the varying products and services they offer, as swel l as the requirement of different technology and marketing strategies (Woolworths 2012, p 119) of each business unit. The reportable segments are split into two categories of Retail Operations and Hotels, with the origin comprising of Australian Food Liquor, juvenile Zealand Supermarkets, flatulency and Big W.As at 24 June 2012, the Australian Food Liquor segment comprised of 872 Australian supermarkets, measureling approximately 6.52% of total EBIT, and 160 Dan spud Liquor stores (Woolworths 2012). The Woolworths convenience liquor businesses BWS and Woolworths Liquor are also included within the segment. This segment relies heavily on consumer confidence levels as the bulk of the sales stems from general groceries found at the supermarket as an alternative to fast food outlets that offer more affordable meal options.Similarly, the New Zealand Supermarkets segment specialises in the procurement of Food and Liquor and products for resale to customers in New Zealand (Woolwort hs 2012, p 119). The Countdown supermarkets operate in the same way as the Woolworths supermarkets in Australia, with a total of 161 supermarkets opened across the country as at June 24 2012.In the Petrol segment, the procurement of Petroleum products for resale to customers in Australia (Woolworths 2012, p 119) is categorised through the Woolworths/Caltex bond paper sites. This segment, coupled with the Big W segment, the procurement of discount general merchandise products for resale to customers in Australia (Woolworths 2012, p 119) round off the reportable retail operations segments as the smallest, bearing not as big influence as the supermarket segments in relation to the group. Furthermore, the hotels segment is heavily affiliated with the liquor stores and supermarkets, as they provide unoccupied and hospitality services including alcohol and food, as well as gaming and accommodation. There are 294 hotel venues in operation as at June 24 2012, with Dan Murphys and BWS sto resaffiliated with over 500 hotels in total.b) Investment analysisWhen determining the better investment between Woolworths Limited and Wesfarmers Limited amidst volatilities in the New Zealand economy and Australian groceries, liquor and petrol sectors, it is important not to make direct comparisons between the two companies encompassing different segment disclosure methods despite the compliance with AASB 8.Woolworths has identified New Zealand Supermarkets as a reportable segment, presenting comprehensive revenue data including other operating revenue and inter-segment revenue. Contrastingly, Wesfarmers does not comply with AASB 8.23 a) and b) by only disclosing the New Zealand revenue by geographical location. Nevertheless, assuming that the sales to customers was used by both companies, the following revenue calculations were calculated since the previous yearComparability between the competing companies becomes increasingly difficult when analysing the investment in relation to the volatile groceries, liquor and petrol sectors. Whilst Woolworths identified the Australian Food Liquor and Petrol business units as different reportable segments, Wesfarmers grouped this financial information under Coles. The information regarding the allocation of revenues between operating units for Wesfarmers is not provided, hampering an ethical place choice for external users.Despite the reporting issues, a revenue analysis was conducted in order to determine the most profitable company. Since the Coles segment was determined by a sum of undisclosed food, liquor, hotels, convenience and petrol data, the following analysis used Woolworths as a sum of its same divisionsThough abiding by AASB 8, Wesfarmers disclosed as little information as possible. It is clear that Wesfarmers possesses a fear of disclosure, and would rather present aggregated data in order to compensate potential informationabout risk, losses and debt levels for a particular companion 2012 $A revenue ( millions) 2011 $A revenue (millions) $A change (millions) % changeWoolworths 4301.8 4110.5 191.3 4.654%Wesfarmers 1283 1174 109 9.2845%Company Segment Revenue 2012 (millions) Segment Revenue 2011 (millions) Segment EBIT 2012 (millions) Segment EBIT 2011 (millions) % change in segment Revenue % change in segment EBITWoolworths 45,815.6 43,478.4 3140 2980.2 5.34% 5.36%Coles 34,117 32,073 1356 1166 6.373% 16.3%segment. However, when removing segment reporting variability between the two companies, it is clear that greater growth opportunities exists for Wesfarmers, and is therefore the recommended investment.c) AASB 8 non-disclosuresi) Despite clear disclosure of revenue for its reportable segments, Woolworths did not disclose its segment assets and segment liabilities. Therefore, it is assumed that the company did not comply with AASB 8.21 b), where information about segment assets and liabilities was not disclosed. However, AASB 8.23 states that an entity shall report a measure of li abilities for each reportable segment if such an amount is regularly provided to the chief operating decision maker (AASB 2010, p 15).Similarly, this extends to the non-disclosure of segment assets according to AASB 25 only those assets that are included in the measures of the segments assets that are used by the chief operating decision maker shall be reported for that segment. Here it is concord that the CODM of Woolworthsdoes not believe the risk and opportunities of these items are important, thus the non-disclosure in the segment reports.ii) Whilst Woolworths was able to disaggregate the diverse aspects of their total business, Wesfarmers aggregated the majority of their core business operation within the Coles segment. It is clear that Wesfarmers does not comply with AASB 8.20 by not enabling users to evaluate the nature and financial effects of the business activities in which it engages (AASB 2010, p 14). However, AASB 8.22 b) states that an entity shall disclose the types of products and services from which each reportable segment derives its revenues (AASB 2010, p 15). It is clear that Wesfarmers abide by this standard by disclosing the components of the Coles segment, instead of the revenue figures generated from each segment.d) ACCC investigationi) Acts of outrageous conduct such as high bargaining strength for Woolworths and Wesfarmers resulting in demands for extra payments, penalties and threat to suppliers that products will be removed from shelves (Rolfe 2013) would be highly financially beneficial to the two groups as they are significantly lowering the costs of supplies, and thus allowing opportunity to increase profit margins. This is further evidenced in Coles 15% increase in pre-tax earnings in 6 months (Rolfe 2013) and a 24% increase in pretax earnings for Wesfarmers despite the same level of stock. The two groups also demonstrate significant market power through interesting competitive methods (Kidd 2013) of purchasing eachothers prof itable stores as the purchases show the significant financial strength (ACCC 2013) of the business.ii) Coles and Woolworths can minimise disclosures as to hide unconscionable conduct and misuse of market power by not disclosing costs of supplies in their segment notes. AASB 8 requires a management approach to be adopted where information used by the chief operating decision maker internally for segment evaluation is disclosed (AASB 8.5b). This allows greatflexibility for management to aggregate figures into the disclosed segments which Woolworths had divided into geographical and operational segments. The aggregated figures disclosed are summarised and does not disclose any information about cost of supplies (Woolworths 2012, p 119). In fact, only revenues attributable to each segment is reported. Australian Food and Liquor segment reported $37,681.4M revenue, which depicts a substantially large segment relative to New Zealand Supermarkets, Petrol, Big W and Hotels, which average at $5000M each.iii) Since Woolworths business in Australia is significantly larger than other segments, from the perspective of consumer groups, it would be beneficial to further divide the Australian Food and Liquor segment into State segments, for example. Currently, Australia has 872 stores, New Zealand has 161 stores and that NSW, QLD, VIC all have larger number of stores than New Zealand, it would be beneficial to further dissect the segments into regional groups.